Q1 2024 Arteris Inc Earnings Call

Participants

Charles Janac; Chairman, President, and CEO; Arteris, Inc.

Nick Hawkins; CFO; Arteris, Inc.

Erica Mannion; Moderator; Sapphire Investor Relations

Matt Ramsay; Analyst; TD Cowen

Hans Mosesmann; Analyst; Rosenblatt Securities, Inc.

Kevin Garrigan; Analyst; WestPark Capital, Inc.

Gus Richard; Analyst; Northland Securities, Inc.

Presentation

Operator

Good afternoon, everyone, and welcome to the Arteris First Quarter 2024 earnings call. Please note, this call is being recorded and simultaneously webcast. All material contained in the webcast is sole property and copyright of the Arcturus, Inc. with all rights reserved for opening remarks and introductions, I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Erica Mannion

Thank you and good afternoon. With me today from our tariffs are Charlie Janac, Chief Executive Officer, and Nick Hawkins, Chief Financial Officer. Charlie will begin with a brief review of the business results for the first quarter ended March 31, 2024. Nick will review the financial results for the first quarter, followed by the company's outlook for the second quarter and full year of 2024. We will then open the call for questions.
Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appear in the press release, our tariff issue today in the documents and reports filed by our carriers from time to time with the Securities and Exchange Commission. Please note during this call, we will cite certain non-GAAP measures, including non-GAAP net loss, non-GAAP net loss per share and free cash flow, which are not measures prepared in accordance with U.S. GAAP.
The non-GAAP measures are presented as we believe they provide investors with a means of evaluating and understanding of the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the nearest GAAP measure can be found in the press release for the quarter ended March 31st, 2024. In addition, for a definition of certain of the key performance indicators used in this presentation, such as annual contract value, confirmed design starts, active customers and remaining performance obligation. Please see the press release for the quarter ended March 31st, 2024. Listeners who do not have a copy of the press release for the quarter ended March 31st, 2024, may obtain a copy by visiting the Investor Relations section of the company's website. In addition, management will be referring to the Q1 2024 earnings presentation, which can be found in the Investor Relations section of the Company's website under the Events and Presentations tab. Now, I will turn the call over to Charlie.

Charles Janac

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report a solid first quarter of 2024 with annual contract value plus royalties of $58.2 million. I'd also like to highlight that we delivered a positive free cash flow quarter, and we are reaffirming our target of achieving positive free cash flow in 2020 for this quarter's success was driven by continued robust licensing activity across all of our verticals, led in particular by enterprise computing and automotive deals. As with recent quarters, the rise in artificial intelligence is a driving factor for our customers.
With approximately half of our first quarter license deals, enabling AI and machine learning design starts increasingly supportive, generally high and large language model applications. We continue to expand our foothold with large customers as five of our significant wins were with top 30 global technology companies. Each of these wins with a major system and semiconductor companies increasingly demonstrates the growing demand for commercial system IP vendors such as our Terrace. We saw continued healthy design activity from our customers, primarily in enterprise computing and automotive, followed by deployments for communications and industrial applications and consumer electronics. One of the enterprise computing wins in the first quarter, it was one of our largest system IP deals with a top 10 semiconductor company. Specifically, it significantly expands the deployment of our Terrace network on chip IPs across a growing number of SOC designs.
This business relationship continues our trend of securing relationships with major technology companies that can be expanded over time. As of today, approximately half of the top 30 semiconductor and technology companies are various customers. As mentioned earlier, the growth of AI is fueling the increasing adoption of our Terrace products, which we believe are well suited to tackle the growing design, size, complexity, performance, power and cost requirements of AI chips. As an example of this trend, we announced that rebalance it pioneering a semiconductor startup in Korea has license Flex, not network on chip IP, Emageon SOC automation integration software for its next generation neural processing unit aimed at January of AI. Brazilians chose our Terrace for our IP and our software, enabling superior performance and design flexibility for their inference chips while meeting energy efficiency requirements needed to deliver cost-efficient AI hardware computing at scale.
On the product front, our flex 95 network on chip launched in middle of last year, continues to find solid adoption. This adoption spans across all our verticals and all of our main geographical markets from small to large customers. Building upon this momentum, we announced the release and immediate availability of the latest version of our anchor cache coherent network on chip IP. Arteris anchor supports any processor IP that connects to end cores to 40 protocols offering multiple protocols, flexible configurations and ISO two six two six two functional safety and is utilized by Mobileye, a long-time customer who is at the forefront of the autonomous vehicle evolution.
You expanded and core IP also delivers on the previously announced ARM and our Terrace automotive partnership targeting a broad range of automotive designs from microcontrollers to autonomous driving chips, collaboration results in pre validation of our test and core interconnect IP, integrating with and supporting various ARM. We nine based processor IPs for automotive semiconductors. The aim is to enable next generation of automotive electronics including advanced driver assistance systems, our ADAS. cockpit and infotainment systems, Vision radar, LiDAR, body and chassis control, and more by optimizing and revalidating arteries and core network on chip to work seamlessly with ARM's latest processor, IP's customers benefit from accelerated path to high performance power efficient and safe automotive SOCs.
Speaking of automotive collaboration at the recent automotive Computing Conference. Mercedes Benz presented a vision for standardization of automotive computing and multi die chiplets supported by partners, including ARM, Intel, foundry Synopsis or in this U.S., Arteris and others. We are excited to be partnering in pioneering a reference with Mercedes-Benz for its network on chip and last level cash implementations as part of the ADU. platform addressing full range of autonomous driving applications yet another collaboration in the first quarter included expanding our risk five ecosystem support to help offer on-chip connectivity for companies deploying the domino view on TI processor IP in their SOCs.
This collaboration underscores our Terry's capability to support process of choices made by our customers, including the support of both ARM and required processors on the same SOC currently certain macroeconomic dynamics, including geopolitical uncertainties and the USBIS. restrictions concerning China, U.S. trade continue to impact our business, though we are not seeing further deterioration at this time. While these dynamics do create near-term headwinds, we believe that the scale and scope of our long-term opportunity remains robust, supported by our strong product pipeline of new system, IP technologies and solid relationships, some of the largest electronics companies in the world who continue to innovate in exciting areas such as JVI. and autonomous driving using our Terra system IP technologies. With that, I'll turn it over to Nick to discuss our financial results in more detail.

Nick Hawkins

Thank you, Charlie, and good afternoon, everyone. As I review our first quarter results today, please note, I will be referring to GAAP as well as non-GAAP metrics. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website as a reminder, I will be referring to the first quarter 2024 earnings presentation, which can be found in the Investor Relations section of the Company's website under the Events and Presentations tab.
Turning to slide 4 of the presentation. Total revenue for the first quarter was $12.9 million, down 2% year over year, up 4% sequential and above the midpoint of our guidance range. If we take into account the change to ratable revenue treatment in the second quarter of 2023, the year-over-year revenue growth would have been 16% at the end of the first quarter. Annual contract value or ACV plus royalties was $58.2 million, also above the midpoint of our guidance range remaining performance obligations or RPO at the end of the first quarter were $74.7 million, representing a 30% year-over-year growth, growing to the highest level we have ever reported and reflecting a solid quarter in terms of new license deals. Gaap gross profit for the first quarter was $11.5 million, representing a gross margin of 89%. Non-gaap gross profit in the quarter was $11.7 million, representing a gross margin of 91.
Yes. Now moving to slide fine. Total GAAP operating expense for the first quarter was $20.6 million compared to $20.3 million in the fourth quarter. Non-gaap operating expense in the quarter was $17 million, up 1% sequentially, but 4% lower than the first quarter of 2023, reflecting the team's continued focus on prudent management of our operating expenses will continue to limit the spending to strategically critical areas while investing in profitable revenue growth. Gaap operating loss for the first quarter was $9.1 million compared to a loss of $8.8 million in the prior year period. Non-gaap operating loss was $5.3 million or 41% compared to a loss of 5.6 million in the prior year.
Period. Net loss in the quarter was $9.4 million, or diluted net loss per share of $0.25. Non-gaap net loss in the first quarter was $5.6 million for diluted net loss per share of $0.15 based on approximately $37.7 million weighted average diluted shares outstanding. Moving to Slide 6 and turning to the balance sheet and cash flow. We ended the quarter with $53.4 million in cash, cash equivalents and investments. Free cash flow, which includes capital expenditure, was positive $300,000. This was above the midpoint of our guidance range and in line with the Company's goal to be free cash flow positive in the current year.
I would now like to turn to our outlook for the second quarter and full year 2024. I'm referring now to Slide 7. I would draw your attention to the fact that our guidance methodology has changed guiding operating loss and free cash flow in terms of dollars incentive percent of revenue. For the second quarter, we expect ACV plus royalties of 58 million to $62 million, revenue of $13.2 million to $14.2 million, with non-GAAP operating loss of $6.5 million to $4.5 million, non-GAAP free cash flow of negative $1.4 million to positive $1.6 million, reflecting strong sales in the first quarter. For the full year 2024. Our guidance is as follows ACV plus royalties to exit 2024 at $62 million to $68 million, up 16% year over year. Atlas, yes, revenue of $54.5 million to $57.5 million, non-GAAP operating loss of between $23.4 million to $19.4 million. Non-gaap free cash flow of negative $2.4 million to positive $2.6 million.
In conclusion, we are encouraged by the strong start to 2024 in our top line and our effective cost management, which has resulted in above guidance performance in our commercial metrics for the first quarter. I'm particularly encouraged by the positive free cash flow generated in the quarter. We aim to maintain this momentum through the remainder of the year. With that, I will turn the call over to the operator to open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Matt Ramsay, TD Cowen.

Matt Ramsay

And thank you very much, everybody. Good afternoon. First of all, Nick and congrats on on the free cash flow. I wanted to ask general question around the RPOR. $75 million and looks like a 30 year over year. And just given some of the accounting changes and different things like that, I just wanted to revisit RPO and how deals are flowing into RPO and what that 30% growth, is that sort of a sustainable level that you guys think can be reflective of the business going forward? And just kind of remind us how sort of peanut butter. It's way revenue over time sort of confidence in what those free cash flow numbers are directional?

Charles Janac

Yes, Matt, I'm happy earnings day that as always, a great question but the way that I'd just remind the way the RPO works is as deals flow in they flow into RPO as they get recognized into revenue, RPO amortizes. And so generally if deals are coming in faster than revenues being recognized and RPO increases, we have had a a sort of a special tailwind by the shift to ratable revenue revenue treatment arm because that that throttled back the speed at which time RPO is being recognized into GAAP revenue. Nevertheless, now all of that 74.7 million of RPO will flow into revenue at some point.
So it gives you some sort of and understanding of the strength of the future revenue pipeline. If there is such a thing that represents somewhere close to a year and a half's worth of run rate revenue, which is essentially in backlog, if you want to for want of a better word. So yes, we're pretty encouraged by that to you to answer your question of can you expect that rate of increase to go on ad infinitum?
The answer is logically and not really it would it will continue to increase because the deal flow is still very strong, but the 30% is in part because of the shift to direct ability, but don't expect it to suddenly die and stop growing and will continue to grow.

Matt Ramsay

Got it. No, that could go quite strongly, not helpful. And I guess just remind me really quickly, wind, which quarter, will you guys report where the RPO number year-over-year will be sort of?

Charles Janac

No. So another very good question. So the second quarter of 23 was when we shifted completely, we did have a couple of this digital deals in the third quarter and a little bit in the fourth quarter of 23 that where we haven't quite managed to stem the from the non-repeatable deals. But now that now they have gone completely. And so but to all intents and purposes, we will be apples-to-apples at lapping, right, right sized numbers by Q2, end of Q2, end of the quarter essentially, so go into Q3, we will be on a like-for-like comparable and there won't be this confusion and more of the well, if it hadn't been for the shift rentability growth would have been ex that right now. If we didn't point that out, I think it would be it would be misleading, no data when we're reporting when when reporting third quarter, essentially, you'll see I'm a true Lifeline.

Matt Ramsay

My second question, Charlie, we are obviously the what's happening on AI across starting in the data center, but and then gradually getting into client-side device and automotive, the edge networking, all the other markets over time and the Yes leader in the industry seems to be speeding up its roadmap and innovation. Will we get a quicker and quicker pace. And I'm wondering if you're seeing that reflected in the interactions that you guys are having customer base in terms of the faster things move it would seem the more likely and more value would be for folks to use third party IP for some of these very complicated systems where it's stressing internal teams as it was are you seeing that on a speeding up of the treadmill affecting any of your business conversations, especially as you rollout new products like?

Charles Janac

Yes. I mean, one of the things that we're learning as we talk to customers is that that we talked about automotive being kind of slow, right, which is both an advantage and a disadvantage in certain sense. Generally, I on the other hand, it's just the opposite are extremely quickly moving because the large language model evaluations and the algorithms are changing very, very quickly. So the silicon has to be done really, really fast in order to make sense for the customers. And then, of course, the lifetime of those of those designs may be relatively short compared to automotive as well. So so the answer is, yes, things are moving. There's a lot of different approaches. There's a lot of innovations.
And the other, there's a I think we've we said that half the design starts that we saw in the quarter were basically machine learning designs and young people are trying to get to very, very fast design cycles, which essentially puts a premium on automation and productivity of system IP generation. So it's an opportunity for sure enough that, that totally makes sense.

Matt Ramsay

I guess my last question, and I thought it was very clear in your script CHARLIE that there are still some headwinds in China, but things of it's certainly stabilized and there's not any additional things. I guess my question and is that you feel like the where we are right now in China for you guys is up this quarter, permanent steady-state OR. If there were a catalyst to, I don't know, unlock the roadblock there and they have things returned to a little bit more normal. What would those be? And are they even remotely on the table or likely?

Charles Janac

Yes. I mean, we obviously, as a management team, we consider a number of scenarios, right? There's the in a scenario where there's some unpleasant MR on Taiwan, which will make things worse. But there's also a scenario that the U.S. and China will come to some kind of an accommodation on aware of where things get better are on those sort of scenarios.
The one that we're banking on is that thing stays the same. That basically we are the business is going to continue at the current level. We're going to keep getting new customers in China and new design wins, but that it's not going to go to the, I would say, the previous bonanza before the before the headwinds sort of started between between China and the US. So where we're planning on four things to stay the same. We're planning for status quo in terms of our Chinese business.

Matt Ramsay

Perfectly clear. Thank you for that, and congrats guys on the progress I'll jump back in the queue.

Operator

Hans Mosesmann, Rosenblatt.

Hans Mosesmann

Yes, I think the congrats guys on the free cash flow on. And Charlie, can you give us a sense on ASP trends over the past quarter, licensing royalties? How is that trend or how is it looking as the year progresses.

Charles Janac

So the ASPs have been growing nicely. It's up. We're pretty much on track of discussing with the ASP trends that we discussed on the IPO a couple of years ago. Of where deals as we get more products into the market with with higher ASPs and as the chips get more complex and use more system ITDAS., these growing growing very nicely. And and I think you our financials show that right? So so that that trend continues. And what we said is that we're going to be at $1 million average by 2026 ASPN. I think that can very easily happen.

Hans Mosesmann

And right now they're around half of that?

Charles Janac

Yes. So right now, I would say it's a little bit of I think last year we were somewhere around 400,000. Now we're probably over 500,000, probably five, 50, something like this, but the reason that we know we're on track is that a number of the deals are over $1 million odd. And so it's definitely not a norm. It's actually probable that eventually the average deal will be over $1 million. So the ASPs are going well, enhances snack.
Nice to catch up again. One other piece of color in addition to Charlie's country, there is when you look at royalties, we've had this conversation before and royalties. The SPM. royalties is also in the ascendancy. And as we have transitioned away from And several years ago into being dominated by the mobility market, the cellphone smartphone market with very small royalty rates now to more dominant dominated by automotive, which has probably three times the royalty rate of them of smartphones and similar devices. And so and some are much higher than that. As Charlie likes to point out, this space type application has substantially higher as so. So that's another drag factor to the upside.

Hans Mosesmann

Okay. That's helpful. And just a question back at the IPO you guys had in since then, I guess you've been saying that in automotive platform, as you could see as many SOCs per car north of 20 or maybe between 20 and 25 from what it was a few years ago, maybe three or four is that still a seeing that to happen over the next several years?

Charles Janac

Yes, absolutely. And I think was pretty modest on that. I think we're pretty much on track towards where that was originally conceived in terms of the time line. I mean, we just don't know yet and it can be more. I mean, we are we had a discussion with a customer and they were telling us that they need 46 cameras for level four driving, right. So that would imply SOC consumption way in advance of basically having four camera SOCs right. So yes, we feel pretty comfortable with that projection.

Hans Mosesmann

Okay. Then last question and I'll let Doug go back in the queue. The time from licensing to tape-out or from time to license to production for your customer engagements. Has that changed over the past couple of years?

Charles Janac

So it has I mean, on a in a particular vertical, it has not right so the automotive designs still take 2.5, three years on what has changed is that as people do more generally, they die designs and those designs, the large language models and the and the algorithmic technologies that are being employed on have impact on the underlying silicon. And and so that segment is moving very, very fast, much faster than any other segment that we've seen, people are looking for nine month design cycles or less on end of product life cycles, probably of one or two years only. And so that segment is moving very, very fast and that would on the average lower the design term. But within each individual segment, we're not seeing we're not seeing much or much change because we enable people to go faster, but the chips are more complex, right? So there's a constant fight between automation and productivity and complexity within each segment.

Hans Mosesmann

Right, right. On Amazon. All right, guys, I'll go back to the queue. Thanks.

Operator

(Operator Instructions) Kevin Garrigan, WestPark Capital.

Kevin Garrigan

Yes, hey, Charlie, Nick, good afternoon. Let me my Let me echo my congrats on the progress from going off of Honda's question regarding kind of SOCs and cars. I know you gave an example of a customer looking for multiple vision cameras. You're seeing a lot more automotive OEMs kind of introduce, I would say, infotainment features right now while that's maybe taking a little bit longer than kind of expected. So is there kind of one category that you're seeing more designs for currently than others like maybe infotainment or the design starts kind of focusing on all functions across the board.

Charles Janac

So we're seeing I mean, the automotive progress continues right so we're seeing some more Tier ones starting to build chips. We're starting to see some more OEMs build chips, right in terms of categories of yellow. While there's a lot of noise and publicity about automated driving. But we don't see the design activity really changing a whole lot, right, because those electronic decisions are made seven to eight years before deployment. So on the design side, we're not seeing any slowdown in the or in the automotive driving direction. It's just that people are realizing. And we've been saying I've been saying this all along is that the automated driving in a city environment is going to be exceedingly difficult without changing the cities and therefore, will take a lot longer. But on highways and secondary drive a highways of primary highways and secondary highways, automated driving is highly useful and very practical and very valuable, and that will continue.

Kevin Garrigan

Okay. Perfect. Thanks, Charlie. And I appreciate that color. And just as a follow-up. So you had noted that there are several more evaluations and for prospective customers in the pipeline for Flex, not five. Do you expect many of these customers to kind of decide sooner rather than later, whether use our tariffs? Or is it more kind of maybe an end of year phenomenon?

Charles Janac

No reflection on five been doing very well, right? So it's the penetration is meeting expectations on the second generation physical awareness provides very valuable capability to our customers that are below 16 nanometer, um, and so and Flex, knock five has a we are at 30% of a pricing uptick. And so so that's a combination of value and ASP increase that that really helps helps the business and what we're looking forward to is sometime this year to announce some further innovation that will it will further provide additional value.

Kevin Garrigan

Okay, perfect. Thanks.

Charles Janac

Yes, thanks, Kevin.

Operator

Gus Richard, Northland.

Gus Richard

Yes, thanks for letting me ask a few questions and congratulations on entering the Promised Land pre a positive free cash flow. If yes, we yes, we've we promised it and we're doing our absolute best to make it happen. You delivered on in the press release, you mentioned five deals with 30 that our global technology companies. Now I was just wondering if you could explain exactly what you mean by top 30 global tech companies is semis is that hyperscalers? Is it by market cap? Is it by revenue? Just a little bit more color on that statement?

Charles Janac

Yes. So in order to have a sort of a unified methodology we're going by market cap. And so it's basically top 20 semiconductor companies by market cap and then top 10 system houses by market cap. And together, they make up the we call the top 30, it's the art TerraStar 30 Technology Index, if I got it.

Gus Richard

And then which which buckets were, those five companies in semi companies are the system houses both both sides.

Charles Janac

And the reason the reason and the reason we wanted to revenue we go by revenue is because the revenue from the public semiconductor companies is available, but you don't know what the system house chip revenue really is. Right. So that's why so it just made market cap just made sense from a sort of a unified methodology perspective, and then just looking at the numbers and sort of realizing how is your cash works?

Gus Richard

Is it reasonable to assume that the bookings in the quarter are on the order of $6 million? So I ask that question again because I didn't get the tail end of it. I'm sure I'm just looking at Sevier County and making some back-of-the-envelope calculations. Is it reasonable to assume that bookings were on the order of $6 million in the quarter?

Nick Hawkins

No, but hopefully a lot more than that be a lot more than that.

Gus Richard

Does that mean our our OpEx runs at sort of high at high 70s. So no high 70s seventeens in the quarter. So yes, but basically a TCV of bookings, total contract value has to run in terms of collections in excess of that to be cash flow positive in the quarter. And then you've got plus or minus working capital shifts at the end of the quarter or the beginning of a cold, which can sometimes come back plus I messed things up a little bit, but that's the that's the basic. T
he basic sales of book bookings, which is what we would call TCV plus and royalties. We would throw into that into that bucket as everything together and have to have to be north of the OpEx number. It did affect us on the non, I guess, the non-GAAP OpEx because and as we non-GAAP OpEx, because obviously the the SPCs is not a cash expense, if that makes sense that makes sense for us.

Charles Janac

Yes, absolutely. Yes, that does indeed come in.

Gus Richard

Then. Typically, you guys announce a new product every year. And I'm just wondering sort of any thoughts on sort of when and what new product might be this year?

Charles Janac

I'm not ready to announce, but what we said is that we expect there to be impact on revenue in the second half. And that said, how that's not changed from the fourth quarter to this quarter?
We are we've been working very hard. We've been making progress and we still feel that the data we're going to make a good on that statement.

Gus Richard

Got it, um, and we're very excited about it and book.

Charles Janac

Yes, on that. That's it for me.

Gus Richard

Thanks. So much. Thanks, guys.

Charles Janac

Thank you, guys.

Operator

There are no further questions at this time. I would now turn the call over to Charlie Janac for closing comments.

Charles Janac

And thank you, everyone, for us. So the good questions and being on the call, and we look forward to seeing most of you at the upcoming conferences that we're participating in, and we look forward to updating you on the progress of the Company. Thank you very much.

Operator

That concludes our question and answer session. Have a great call and you may now disconnect.